Pacific Lake Partners, a pioneer of search fund investing, completed fundraising for its fourth vehicle, securing $175 million.
Pacific Lake Partners Fund IV was backed mostly by returning investors, Managing Partner Coley Andrews told Buyouts. LPs included endowments and foundations, family offices and wealthy investors, among them search fund CEOs and other entrepreneurs, he said.
Fund IV is the Boston-based private equity firm’s largest flagship fund to date, exceeding by 13 percent the $155 million raised by its predecessor two years ago.
Launched in 2009, Pacific Lake was among the first PE firms to focus exclusively on search fund investing, a more than 35-year-old niche market that targets MBA graduates and other young entrepreneurs seeking to buy and run companies. Search fund investors generally invest alongside one another to seed an individual’s or team’s search for an established, high-growth business and then finance the acquisition.
Pacific Lake specializes in providing both “capital and human capital to support entrepreneurs along their entire journey,” Andrews said.
The process begins with Pacific Lake developing relationships with entrepreneurs who have the potential to become first-time CEOs. Those making the grade are given access to in-house resources, such as mentoring and networks, that facilitate everything from conducting a search and structuring a deal to operating and scaling a company in the post-acquisition phase.
Pacific Lake invests in entrepreneurs looking to buy lower mid-market companies in B2B or B2C service industries. Target opportunities have Ebitda of $2 million to $5 million and Ebitda margins of more than 15 percent. Acquisition prices are typically 6x Ebitda for businesses expanding at an average of 10 to 20 percent per year.
Pacific Lake has so far partnered with more than 200 entrepreneurs, the majority of them U.S.-based. It mostly invests over a period of five to eight years but has the capacity to go longer through recapitalizations.
Entrepreneurs backed include Steve Lau and Rameez Ansari, who in 2014 acquired FieldEdge, a Fort Myers, Florida-based service management software provider to contractors. Andrews, who served on the board, said the co-CEOs grew the company “faster in four years than it had in the previous 10” by developing a SaaS product and refining the go-to-market strategy. FieldEdge was sold in 2018 to Advent International.
Andrews said Fund IV will maintain Pacific Lake’s strategy, making about five to 10 investments per year. Fund III invested in 30 companies.
Search fund investing has gained momentum in recent years due to increased awareness of the model at top MBA programs as well as capital inflows, Andrews said. This is partly a result of performance. A study issued last year by the Stanford Graduate School of Business found $924 million invested in the market between 1984 and 2017, generating a total value for investors of $5.7 billion. This translates into an aggregate pre-tax IRR of 33.7 percent.
Pacific Lake, which also has an office in San Mateo, was founded by Andrews and Managing Partner Jim Southern, a former search fund entrepreneur. Southern got his start in 1984 under the mentorship of Harvard Business School Professor H. Irving Grousbeck, who is credited with originating the concept. Prior to Pacific Lake, Andrews was an associate with Golden Gate Capital and a management consultant with Parthenon Group.
Action Item: Download the 2018 search fund study by Stanford Graduate School of Business here.